Praet Encouraged by Euro-Area Resilience After Brexit Vote

The euro-area economy is showing “encouraging signs of resilience” following the U.K.’s shock decision to leave the European Union, European Central Bank Executive Board member Peter Praet said on Wednesday.

“The data have been almost if you hadn’t gotten anything with the British exit,” Praet, the ECB’s chief economist, said in a Bloomberg interview in Beijing. “We’ve been very careful about not drawing hasty conclusions about the referendum in the U.K. and so far we are proven right to say let’s observe a little bit how it goes, and you will see with the projections.”

The ECB will set monetary policy on Sept. 8, when it will assess the impact of the U.K. vote on the euro area’s gradual recovery and publish revised economic forecasts for the currency bloc. While the Brexit impact so far has been limited, Praet cautioned a lot was riding on the outcome of two-year negotiations, which haven’t even started.

Negative Rates

Earlier, Praet joined his colleague and Governing Council member Francois Villeroy de Galhau in defending the central bank’s current strategy of negative interest rates and large-scale asset purchases, which has drawn criticism that it’s distorting markets. Deutsche Bank AG Chief Executive Officer John Cryan has been among those calling on policy makers to change course as the side effects of the policy are hurting banks.

Asked about policy options the ECB will consider at its upcoming meeting, Villeroy de Galhau pointed to the policy package the central bank presented in March.

“Our priority has been since to implement this comprehensive package in the best possible way,” he said. “This is what we are doing. It is powerful, it is efficient,” and “it is developing in a smooth way and a quite satisfying way.”

The ECB’s framework incorporates “important safeguards to prevent an overly narrow and zealous interpretation of price stability from becoming a source of financial instability,” Praet said in the text of a speech in Beijing on Wednesday. The central bank will “exercise caution” with the instruments it chooses, Villeroy de Galhau said at an earlier event in Frankfurt.

While the ECB was monitoring the impact of its monetary stimulus on financial stability, governments and regulators must also play their part in preventing imbalances, they said.

Praet also pushed back against the charge that the central bank’s ultra-accommodative stance could allow the buildup of risks such as asset-price bubbles, saying it effectively leans against the wind.

Flexible Horizon

“The representation of monetary policy as focusing on a short policy horizon and with little regard for broader financial cycles does not do justice to the strategies that many central banks follow today, and certainly not to the strategy of the ECB,” Praet said. “The ECB follows a flexible medium-term horizon and, as part of its two-pillar strategy, closely monitors the dynamics in money and credit which may act as signals for the build-up of financial imbalances.”

Praet and Villeroy both said they believe the central bank’s current stimulus is warranted, and urged other actors to take suitable measures to support monetary policy while safeguarding financial stability.

Figures published Wednesday showed euro-area inflation was unchanged at 0.2 percent in August, and unemployment held at 10.1 percent in July. Both numbers were weaker than economists’ estimates.

“Monetary policy of course plays an important role, because it secures the monetary stability necessary for economic growth,” Villeroy said. “But monetary policy alone is not enough.”